There is a lot of evidence that lifestyle funds are growing in popularity. In a survey published last year, Hewitt Associates said that more than half (55%) of the large employers canvassed did so, a 20% jump from 2001 levels (see Hewitt: Employers Luring More 401(k) Investment Activity ). Another report from Greenwich Associates last year noted that 15% of employers are “seriously” considering adding the option, and estimated that as many as 40% of larger plans already offer this option (see Greenwich Finds DB Bundling, Advice Trend Higher at Mid-Size Plans ).
In fact more than three-quarters ( 76.7% ) of this week’s respondents do currently offer the funds – with what can best be described as “mixed” results. One reader summed up support for the offerings like this: ” I’m a fan of these funds for one reason, they will adjust the allocation over time and, let’s face it, employees just don’t rebalance.”
To their credit (IMHO), a surprising number or this week’s respondents were using the lifestyle funds not just as an option, but as the default investment option (rather than the traditional money market choice). As one noted, ” We use Negative Election, hence 49% of all new contributions are going in to these funds. Some folks are oblivious to this investment selection/default process, but many have said, ‘Yes those are the right choices for me.'”
We didn’t specifically ask about the current allocation of assets in the funds, but a number of readers offered that interesting information. Simplistically, in terms of overall allocation, it seems to be 5% to 15% of total plan assets among those who have made an attempt to track it. There were exceptions, including the reader who noted, “About a third of our assets are in LifeStrategy funds, but part of the reason for the high percentage is that we mapped our old profit sharing account into the LifeStrategy Growth Fund when we switched to Vanguard. Also, we automatically enroll new employees at the 3% level unless they specifically waive out.” Another noted, “We are using T. Rowe Price’s lifestyle funds, Retirement Date Funds. Over half of our participants are invested in one of 5 funds based on your planned retirement date.” “We offer 9 investment choices, 3 of which are lifestyle/balanced funds. Approximately 30% of the plans assets are directed by the participants into these funds,” offered one respondent. Another noted, “We added the Fidelity series back in 2001. They now constitute almost 9% of plan assets.”
There are problems, of course. One notes, “We offer Putnam Retirement Ready Conservative, Balanced, and Growth funds. I don’t think participants really “get it,” though, because we actually have participants with money in all three.”
Some readers who don’t currently offer the option did, once upon a time. One noted, “Greatest disappointment was when we discovered that participants had invested in two or three of the funds rather than using a lifestyle fund as a broad mix of investments targeted toward risk and time. We discontinued the funds and heard virtually no noise from participants. Good experiment, poor result.”
Others who didn’t offer lifestyle funds per se did offer alternatives to the typical “mix your own” alternative. “…we offer two stock/debt balanced funds,” said one respondent, “one 60/40 and the other 40/60 (roughly). The 60-40 fund is our default, and we encourage participants who are not comfortable directing their investments to stay in the default fund.”
Despite the fact that some don’t “get it,” overall, that seemed to be a small percentage of the overall audience. In fact, one reader noted, “Although we do have some participants who clearly don’t understand the purpose of a lifestyle fund since they’ve put a portion of their money into each of the funds, I think most of the participants do understand the purpose of these funds.” That same reader went on to note, “However, that being said, they all still chose to put only a small portion of their account into a lifestyle fund and have invested the balance of their accounts in other funds that they’ve chosen. So they either believe they might be able to get better returns by choosing some of their own investments or they don’t understand the purpose of a lifestyle fund as much as I think they do.”
Some respondents were opposed to the concept, generally on the basis of fees, or in some cases, the objection was more philosophical. One noted, “If you went to a Registered Investment Advisor for investment advice, and they asked you just one single question, ‘In how many years do you plan to retire?’ and from that gave you an asset allocation, they could be stripped of their license to practice. One question does not make for proper due-diligence.” Another said, “I believe these funds may be attractive to employees who want to take the mystery out of the selection process. However, I personally believe in educating our workforce through a targeted communication program which addresses risk and return characteristics in connection with the funds offered and then further expands into the associated investment fees tied to their selections.”
One reader described their experience this way: “We have seen more money going into them in the past couple of years in total, but I’ve not broken the activity out by age or salary or anything else which might give some insight. Now I know what to do with myself this afternoon….”
But this week’s Editor’s Choice goes to the reader who explained, ” We introduced them in January 2003 and had VERY HIGH hopes for them…Thirty-six percent of our participants are using the options but with only 8% of their assets. Those using the Target funds should have the majority of their assets in those funds, but they have only 30% in them. Those using the Target funds should use fewer funds than those who are not using them, but they use more (average of 5.4 versus 2.4). Thirty-six percent of our participants are using the options but only 1% strictly as intended (100% of their assets in the funds and only using one or two of them). [Pause…take deep breath…recite Serenity Prayer…]…These funds are awesome. We have very high hopes for them….”
Thanks to everyone who participated in our survey!
Yes, we offer moderate and aggressive funds. Unfortunately, most of our employees don't understand that they can be diversified by choosing just one of them. They still try to diversify by investing in multiple funds that may be all of the same type anyway, so they're in 6 stock funds, but have nothing in bond or money market. Employees think the word "diversify" means don't put your eggs in one basket, just choose any bunch of baskets.
Yes, we offer them through Fidelity. They are our default option. We use Negative Election, hence 49% of all new contributions are going in to these funds. Some folks are oblivious to this investment selection/default process, but many have said "Yes those are the right choices for me".
We offer four Vanguard LifeStrategy Funds, from very conservative to moderately risky. About a third of our assets are in LifeStrategy funds, but part of the reason for the high percentage is that we mapped our old profit sharing account into the LifeStrategy Growth Fund when we switched to Vanguard. Also, we automatically enroll new employees at the 3% level unless they specifically waive out. If an employee fails to select investment funds, we put their contribution in one of the LifeStrategy funds - their age determines which fund we select.
Yes we have them. I'm not sure of the name, since I don't select them as my investment choices. As for usage by my co-worker/participants, I'm not sure.
Yes, our plan includes models and they have been well received and utilized. The models are automatically rebalanced each quarter. The models are Aggressive, Moderate Aggressive, Moderate, Moderate Conservative and Conservative. Each model is built from a mix of other funds that are offered through our plan.
We have created asset allocation models made up of the other funds that participants can choose from. There are 4 from Conservative to Aggressive and about 75% of the participants that have enrolled since these have been rolled out have chosen one of the models.
Our plan provider is Principal Financial and we offer their 6 lifestyle funds: 2010, 2020, 2030, 2040, 2050 and Strategic Income. However, only about 7% of our plan's assets are invested in these funds. Although we do have some participants who clearly don't understand the purpose of a lifestyle fund since they've put a portion of their money into each of the funds, I think most of the participants do understand the purpose of these funds. However, that being said, they all still chose to put only a small portion of their account into a lifestyle fund and have invested the balance of their accounts in other funds that they've chosen. So they either believe they might be able to get better returns by choosing some of their own investments or they don't understand the purpose of a lifestyle fund as much as I think they do.
We are using T. Rowe Price's lifestyle funds, Retirement Date Funds. Over half of our participants are invested in one of 5 funds based on your planned retirement date. 2040 Fund, 2030 Fund, 2020 Fund, 2010 Fund or Retirement Income Fund. These funds replaced the old lifestyle funds in our account which required the participant to rebalance or change funds as they got closer to retirement. These new funds rebalance for you automatically. Investors in the 2040 Fund have a 90% equity allocation, while those in the Retirement Income Fund have a 40%-60% equity bond ratio.
Yes, we put in the BB&T Capital Manager Funds Conservative Growth, Moderate Growth, Growth, and Aggressive Growth in 2002. Currently the Conservative Growth accounts for 3.92% of our total account balance, the Aggressive Growth is at 1.17% and the other two funds are less than 1% of the total account balance.
Our plan includes three "life stage" options - conservative, moderate, and aggressive. From the enrollment forms I've seen over the past few months, the majority of new hires are going with the moderate portfolio. As we have opened 2 new hospitals this year, that's quite a bit of hiring - and quite a bit of moderate selection!
Both of our 401k plans offer Fidelity Freedom Funds. Our fund line up provides participants the option of investing in multiple funds for those who prefer to control their accounts as well as the life style funds for those who prefer to have it managed on their behalf.
Our plan does offer target retirement funds, the Fidelity Freedom funds. We have two problems. First, the stickiness of existing money means that primarily new money is flowing to these options and they are growing slowly. Second, people use them like any other investment option and they blow their asset allocation completely out of the water. Someone makes a conscious decision that the allocation in the 2030 fund is right for them and then they go put half their money in a small-cap growth fund and an international fund. Now what have they got?
I'm a fan of these funds for one reason, they will adjust the allocation over time and, let's face it, employees just don't rebalance. I always get a kick out of the reports (such as Hewitt) that show how low trading activity is in the face of turbulent market conditions. They tell us it demonstrates the effectiveness of our education efforts and people are "staying the course" What a load of .... Participants just aren't paying attention to their retirement plans. That's why there's no activity.
We have them thru the Principal and the funds are by ten-year increments thru 2050. So far they have attracted little attention from participants. These funds are sometimes called "Investments for Dummies" because it's a no-brainer to save this way. Ironically, most participants would be better off if they used this approach instead of chasing yesterday's hot fund or riding with winners but failing to rebalance periodically.
Our 401(k) plan has always offered the Lifestyle Funds (Conservative, Moderate, Balanced, Growth, Aggressive) in addition to the opportunity to design your own plan with the individual funds.
50% of participants have chosen the Lifestyle funds.
Yes, our plan offers lifestyle/target funds:
Fidelity Freedom Funds
Currently, 17% of the plan's total assets are invested in these funds and they are increasing in popularity.
Yes, we have 5 lifestyle funds. They are risk based depending on the suggested number of years to retirement, and they each overlap slightly in suggested years to retirement. Participants have approximately 25% of our total plan assets invested in these funds. Having just attended the Mid-Sized Pension Conference in San Francisco, if I had my druthers our funds would be designed to move from lifestyle fund to lifestyle fund based on age/years to retirement - right now a participant must tell the recordkeeper to move from one lifestyle fund to another as they move closer to retirement and/or want to reduce their risk.
A few people use them, but I don't know the percentage. Some people use them as they are 'designed' to be used, but some people who are in their early 30's have a large % of their money in the 2010 Fund, which means they should be retiring in the next 5 - 10 years.
We have been using the Fidelity asset allocation funds for several years. Many of the participants who have signed up since we introduced asset allocation funds have signed up for one of these funds which is what we hope would happen. Despite many attempts at education, participants who started before we had asset allocation funds, tend to mix and match asset allocation funds with other types of funds and other asset allocation funds which is not what we hoped for. The overwhelming majority of participants follow the investment law of inertia by selecting their investments when they sign up and never look at it again.
We offer Putnam Retirement Ready Conservative, Balanced and Growth funds. I don't think participants really "get it" though because we actually have participants with money in all three. Total investment in these funds is less than 3% of plan assets.
Survey questions about lifestyle funds brings back painful memories.
We offered three lifestyle funds, for short term, medium term and long term investment horizons. Funds were established as "fund of funds" which was hard for participants to understand and if they did not understand the composition, they certainly understood that the funds performed below the combined benchmarks.
Greatest disappointment was when we discovered that participants had invested in two or three of the funds rather than using a lifestyle fund as a broad mix of investments targeted toward risk and time. We discontinued the funds and heard virtually no noise from participants.
Good experiment, poor result.
In addition to a fund line-up that includes 8 mutual funds and a company stock fund, our plan offers 5 model portfolios which are predetermined mixes of the some or all of the mutual funds in the Plan. Unfortunately our recordkeeper tracks the model portfolio as an investment election into each of the mutual funds and not an election for that portfolio so tracking the utilization has been difficult.
Yes we do but they are expensive, 125 bps, and I do not know who provides them. But here is a cautionary comment: If you went to a Registered Investment Advisor for investment advice, and they asked you just one single question, "In how many years do you plan to retire?" and from that gave you an asset allocation, they could be stripped of their license to practice. One question does not make for proper due-diligence. While lifestyle funds are an interesting idea, they in no way should replace sound investment advice and planning. If we think that lifestyle funds are an acceptable answer to the failure of meaningful 401k advice, we have just thrown up our hands and given up. Let's try again and try harder this time.
In many instances, lifestyle funds are not used appropriately. For example, in two of our plans, we have one in our fund lineup which, in itself, is a problem since it is only addressing participants with a short-term horizon. However, we are not requiring these participants to be 100% invested in this fund. Therefore, it defeats the real purpose. In another plan, we have several life-style options, but we do require 100% allocation. In a recent vendor search we conducted, one of the three finalists offered (and was really pushing) "end date" funds. We did not select this vendor and in fact, when we consolidate plans and transition to a new vendor 7/1/04, we will not have any lifestyle or end date funds in our lineup. I believe these funds may be attractive to employees who want to take the mystery out of the selection process. However, I personally believe in educating our workforce through a targeted communication program which addresses risk and return characteristics in connection with the funds offered and then further expands into the associated investment fees tied to their selections.
We don't offer lifestyle funds today; however, we're in the process of developing a new plan for a portion of our business that will roll out January 2005 and it will offer lifestyle funds along with other funds and a brokerage window.
We offer 9 investment choices, 3 of which are lifestyle/balanced funds. Approximately 30% of the plans assets are directed by the participants into these funds. Given the diverse demographics of our participants, we feel that these funds are being utilized appropriately
We added the Fidelity series back in 2001. They now constitute almost 9% of plan assets.
We currently offer a "package" of 5 lifestyle funds, and recently discussed replacing them with 2 balanced funds that -combined - can "do the same job" with better results and less risk. In the end, though, we decided that - though not hugely popular -they do serve a purpose for some employees who are just not comfortable making allocation decisions. What we plan to do is focus upcoming investment education sessions on asset allocation. If we see significant transfer activity, we may try to ease out of them.
We have the Vanguard Asset Allocation fund in our Savings Plan and 4.5% of Plan assets are invested in it. As there are 12 investment choices over the range of investment types, employees can make their own "asset allocation". Therefore, this relatively low % of participation in an asset allocation fund is to be expected.
We do not offer "life style funds" as such among our mutual fund offerings, although we two offer two stock/debt balanced funds, one 60/40 and the other 40/60 (roughly). The 60-40 fund is our default, and we encourage participants who are not comfortable directing their investments to stay in the default fund.
Our 401(k) does not offer any lifestyle/target type funds although we do offer the Income fund of America and a variety of equity funs with different styles, but only one bond fund with an intermediate term.
We offer five "Target" asset allocation funds. These funds are AWESOME. They are each associated with a target date (year), have different stock allocations which decrease over time to the target date, and are automatically rebalanced. All a participant has to do is select their target date (for example, retirement) and invest 100% of their assets in one fund (or two if they are between target dates). We introduced them in January 2003 and had VERY HIGH hopes for them.
Thirty-six percent of our participants are using the options but with only 8% of their assets. Those using the Target funds should have the majority of their assets in those funds, but they have only 30% in them. Those using the Target funds should use fewer funds than those who are not using them, but they use more (average of 5.4 versus 2.4). Thirty-six percent of our participants are using the options but only 1% strictly as intended (100% of their assets in the funds and only using one or two of them).
[Pause…take deep breath…recite Serenity Prayer…]
Since 1998, we have increased from three funds to 13 funds. Forty-one percent of our participants are not using any of the new funds (100% of their assets in the original three). Given the structure of our funds, it makes absolutely no sense for our participants to use more than six of the funds, but 10% of our participants are using more than six. We have a very large number of participants who have assets in all 13 funds (probably only because it is hard to divide by 13 in your head - when we had ten funds, we had a much larger number invested in all ten funds).
[Pause…take deep breath…recite Serenity Prayer…]
These funds are awesome. We have very high hopes for them…
We offer T RowePrice's 2010, 2020, 2030,2040 and Retirement Income funds. Just put them in this year. (One participant must be keeping his options open--he put money in all of the funds)
Our qualified DC plan offers 5 lifestyle funds - Barclays LifePath Retirement Fund, Barclays LifePath 2010, 2020, 2030, and 2040. They are not being used by participants the way we hoped. Each fund has less than 1% of plan assets, except the 2020 fund which has 6.8% of plan assets. The reason - we mapped our previous "balanced fund" to the 2020 fund. We are now faced with the challenge of educating those participants to recognize that this fund, over time, will not reflect the 40/60 bond/equity mix that a balanced fund maintains. I was poking around in participant data the other day and noticed that one participant has directed contributions to each of the lifepath funds. Education on the lifepath funds has been an agenda item in the last two quarterly Committee meetings.
We offer 4 life style funds... Conservative, Moderate, Aggressive and Ultra Aggressive. About 18% of plan assets are in these funds. By far the most popular fund here is the Moderate with 7%, however the most popular plan fund is the guaranteed account at 30% of plan assets.
The District uses Fidelity as Recordkeeper and yes, in keeping with good counsel, the District does participate on Fidelity's Lifestyle funds 2010, 2020, 2030, and 2040 AND soon to add "On the 5s" meaning adding 2005, 2015, 2025, 2035 and yes, may reach for 2045. Life is good in the Fidelity cradle guarded by the wise Fidelity foxes and the bed, the chair and the porridge is "just right".
Our 401(k) plan offers two balanced funds:
The custom "Indexed Balanced Fund" passively managed by Mellon Capital Management.
The custom "Managed Balanced Fund" actively managed by Frank Russell Trust.
These funds were added per the request of employee focus groups. The participation in these funds has fallen within our expectations.
Lifestyle funds were given some consideration by management but in the final analysis, it was decided to offer enough individual funds to allow a participant to make their own allocation, based on financial advice they receive through their own advisors and/or searches. We keep our fund offerings simple to encourage our participants to take a long-term view.
Regardless of what any plan sponsor decides, the average participant needs to be proactive in getting the answers needed to help them secure their financial future. Otherwise, we should call them "spectators", not "participants".
We used to offer 3 pre-mixed funds based on risk tolerance: Aggressive, Moderate and Conservative. Participants didn't demonstrate much interest and didn't move much money in. Among those who did, quite a few were also significantly invested in other funds, which indicated some confusion about what the pre-mixed funds were designed to do. After a few years, we discontinued the funds.
Our plan administrator is Fidelity, and they have been promoting their Freedom Funds for the last couple of years. They are age-based asset mixes. When they were first offered, the age range for each fund spanned 10 years, which I considered way too broad; in all likelihood, the average risk tolerance of a 52 year old would be much different from a 61 year old person. The funds now cover 5 year spans, which sounds much more sensible. We are considering them, but I am in a "wait and see" mode, for now, to gauge how attractive they are to participants in other plans. I am not so interested in how many plans add these funds as I am in what percentage of the plans' assets get switched into them by participants.
Our plan is administered by Fidelity and uses lifestyle funds based upon the date you choose closest to your anticipated retirement. There is some activity in them - mostly by persons who want to diversify but do not know how.
In our national manufacturing environment, we have offered Fidelity "Freedom Funds" (which are considered lifestyle funds) over two years ago. Our utilization has increased about 15% per year.
Yes we have a lifestyle fund in our 401(k) plan. It is the Fidelity Freedom Funds. We introduced them about 2.5 years ago and their popularity is growing, but I don't really know how to tell if they are being used properly.
We use three lifestyle funds offered by American Century Funds. They are being widely used in our plan. Our participants find they address their diversification concerns.
Our 401k plan has offered four asset allocation funds through MFS since last July, ranging from conservative to aggressive growth. Most of the usage is from new enrollments. We didn't have any expectations, but thought the addition of those funds was a no-brainer. There was no additional cost involved, and for participants who just have no idea what a large cap (or any other type of) mutual fund is, and have never heard of Morningstar, it was just what the doctor ordered.
Our plan offers (among other things) the Fidelity Freedom Funds, which are lifestyle funds. We have seen more money going into them in the past couple of years in total, but I've not broken the activity out by age or salary or anything else which might give some insight. Now I know what to do with myself this afternoon...
In my experience, and after exhaustive technical performance analysis, I have concluded that Lifestyle funds are the means by which mutual fund companies continue to sell poorly performing funds and continue to avoid appropriate measurements of performance while generating extra revenue. I have never seen a Lifestyle fund with performance worth of continued existence.
Also, what does a plan sponsor do when it incorporates Lifestyle funds and then, in a subsequent period, removes a fund for poor performance, but the fund removed is still included in the Lifestyle fund allocation?
The artificial sense of well-being sold to plan fiduciaries together with Lifestyle funds is likewise hollow.
The coverage on lifestyle funds was extremely interesting to me. We continue to hash out the 'best' mix for our employees in our own plan so new information is welcome. There is however a continuing thread through the comments that is for lack of a more thoughtful word "typical". The HR and Plan mavens know what is 'right', or know 'the right mix', or know how people 'should' allocate. The breath of air came from the person who reflected on an RIAs advice but the bulk of the respondents sound like my own HR folks. There is a real parental streak in most HR people.
I was surprised that so many folks expressed disappointment at the fact participants 'are not using the funds correctly'. I'm not really surprised that they aren't using them correctly as very few participants actually do allocate their investments properly. However, no one mentioned that these participants are highly likely to be better off than what they were choosing to invest in prior to the introduction of the funds.
Having met with retirement plan committees for over 10 years, it seems to me that virtually every plan suffers from what I call the barbell effect. The "I don't know what to do so I'll put it all in a money market" folks on the one side and the "I'm chasing last years high flyers and oh by the way we don't offer enough funds" folks on the other. A smaller percentage of participants fall in between.
Though we try to educate the chasers, I'm not sure how successful you'll ever be with that population. The point of the Lifestyle options is that those participants who have asked what to do with their money and been told "I can't give you advice" now have a place to go. As an example, I'm happy to see 25% allocated to a Lifestyle fund rather than the tech fund or money market it was in prior to the addition of the Lifestyles.
Based on the adoption rate of other funds over the years and my observations of participant aggregate activity, it's no surprise to me that these Lifestyle funds don't have a very large percentage of the overall trust. It takes time for people to adopt these changes. Give it time; participants are far better off than when you didn't offer them.